TSP Combats Rapid Traders with Transaction
Limits

November 21, 2007 (PLANSPONSOR.COM) - Faced with a
small group of government workers who have engaged in quick
in-and-out stock and bond transactions, the board governing
the federal government's Thrift Savings Plan (TSP) has now
limited participants to two interfund transfers per
month.

Until the TSP can program its recordkeeping system to
account for the change, a Washington Post news report said
the board authorized a letter to be sent to the
2,000
to 3,000 frequent traders and to ask them to stop the
rapid-fire transactions because of the added costs they
generate for the funds.

If they do not, they will be allowed to buy and
sell only through the mail until the new, automated curbs
take effect in March or April 2008, the report said. In
addition, participants who think they have made an
investment mistake would be allowed an additional
transfer into the plan’s government securities
fund.

Timing Trials

Market-timing – the quick movement of funds in and
out of mutual funds – was one of the concerns that arose
in the recent mutual fund trading scandals. In response,
many mutual fund companies imposed new redemption fees
and trading restrictions, and the Securities and Exchange
Commission (SEC) imposed new reporting requirements that
have been imposed on employer-based retirement plans (see
With Time to
Prepare, 22c-2 Deadline Passed without Fanfare
). Some mutual fund companies also charge redemption fees
for shares held less than 30, 60 or 90 days.

TSP officials said it is significant that a
relatively small cadre of participants is helping to
drive up costs for the program, which has more than 3.8
million members. “It is real,” board Executive Director
Gregory T. Long told the Post. “A small group of people
are causing damage to hundreds of thousands who don’t do
this.”

According to TSP data, trading volume in stock and
bond funds has grown substantially since 2005 and has
expanded disproportionately to market value. More large
trades also are taking place.

Track Record

The Post article reported that, for example, $371
million of the plan’s assets were transferred into an
international stock fund on October 19; $391 million was
transferred out. Officials said 2,018 participants who
sold their international stock on October 24 had bought
the stock on October 19. Of that group, 323 were trading
$250,000 or more – moreover, during the previous 60 days,
those 323 traders had made 5,804 exchanges in the
international fund worth $1.9 billion, the TSP officials
said.

TSP said higher broker fees and transaction costs –
especially in the international fund, where it’s more
difficult for the TSP’s investment manager to match buy
and sell orders – have resulted from the rapid trading
patterns.

The news report said part of the issue is that
the TSP did not place a limit on the number of
transfers among its funds when it went to daily
valuation.Long said that frequent traders “won’t be happy” to
see trading curbs. “They will complain loudly, but our
job is to take care of all participants,” he said.